What the spread actually costs you

Every instrument has two prices: one you can buy at and a lower one you can sell at. The gap between them is the spread, and it is how most brokers are paid.

The practical consequence is that a position starts underwater. Open a trade and close it immediately and you lose the spread. The market has to move in your favour by that much before you are level.

01What it costs

Spread cost equals the spread multiplied by the value per point multiplied by your position size. On a one lot position where a pip is worth £10, a 1.5 pip spread costs £15 to open. That is the number, and it is knowable in advance.

Now multiply by frequency. Three trades a day, five days a week, at £15 a time is around £11,000 a year in spread alone. That is not an argument against trading. It is an argument for knowing the figure, because most people have never worked it out.

02Why it widens

• Liquidity. Fewer participants means a wider gap. The UK alone handles around 38 per cent of global FX turnover and the four largest centres about three quarters of it, which is why the London hours are the deepest and the Asian session and the daily rollover are thinner.
• News. Spreads widen around scheduled releases and can widen dramatically around unscheduled ones.
• The instrument. Major currency pairs are tightest; exotics, indices and commodities are wider.
• Account type. A raw or commission account shows a tighter spread and charges separately, which is a different presentation rather than automatically a cheaper one.

03What raw spread means

A raw or ECN account passes through the underlying market spread and charges a commission on top, instead of widening the spread and charging nothing visible. The total is what matters, and comparing a raw spread against a standard spread without adding the commission is comparing two different things.

Work out the all-in cost per trade at your typical size. That is the only fair comparison between accounts and it takes about two minutes.

You are not on your own with the arithmetic either. A firm has to disclose costs and charges to you in aggregate under COBS 6.1ZA, both as a reasonable estimate before you deal and as the amount actually incurred afterwards. If a broker cannot produce a single all-in figure for a typical trade, that is itself worth noticing.

The same principle sits inside the best execution rules. Under COBS 11.2A.9R the best possible result for a retail client is measured on total consideration: the price of the instrument plus all costs directly related to executing the order. Price on its own is not the test the firm is held to, and it should not be yours.

04What counts as a good spread

It depends on the instrument and the time of day, so any single number quoted as good is marketing. The useful benchmark is your own broker's typical spread on your instrument during the session you actually trade, measured rather than taken from an advertised figure.

Advertised spreads are usually typical or minimum values drawn from the most liquid hour of the day. Yours, at the time you trade, may be quite different.

That is not necessarily sharp practice. Financial promotions must be fair, clear and not misleading under COBS 4.2.1R, and a typical figure labelled as typical clears that bar. It just means the number was never a promise about your session, and checking it against your own platform is the only way to know what you pay.

05How it changes your trading

Spread is fixed per trade and independent of how far the market moves, which means it is proportionally enormous on small targets and trivial on large ones. A strategy aiming at ten pips pays a far higher percentage in costs than one aiming at a hundred.

That is the honest reason many short-term strategies fail. Not because the analysis is wrong, but because the edge is smaller than the cost of taking it.